Health savings accounts (HSAs) are a great way to save money and efficiently pay for medical expenses. HSAs are tax-advantaged savings accounts that accompany high deductible health plans (HDHPs).
While HSAs are a helpful approach to paying for medical care, the fact that they combine both insurance and tax regulations make them a unique type of benefit with a fairly involved set of requirements. There can be confusion over how HSAs are administered, especially concerning unusual scenarios. The following questions address situations that HSA owners may find themselves in, but are not a typical part of standard HSA information.
What if I want to deposit the maximum annual contribution at once?
This is allowable. While HSAs are typically deducted from your paycheck and deposited every pay period, you may opt for a one-time payment provided that:
Your contribution does not exceed the HSA limit when added to an employer contribution. HSA limits apply to the overall account contribution, and not to each person or entity depositing money into the account. For this reason, you may need to calculate the yearly employer contribution before determining your personal maximum contribution.
You are eligible to contribute to an HSA for the entire year. If you obtained HSA eligibility after Jan. 1, your maximum contribution limit decreases by one-twelfth for every month you are not eligible. You can only make a contribution for the months you’re eligible. There is an exception to this rule for individuals who are eligible to contribute to an HSA on Dec. 1 of a calendar year. They are allowed to contribute an amount equal to the annual HSA contribution amount provided they remained covered by the HSA for at least a 12-month period after contributing.
What if my spouse or family member wants to make contributions to my HSA?
Family members may make contributions on behalf of other family members, provided:
The total contribution put forth by you, your family member and your employer does not exceed the annual contribution limit (with only a single exception for the additional catch-up contribution if the account holder is at least 55 years old).
What if I want to use an HSA to pay for my dependent’s medical care?
This is generally allowable, as qualified medical expenses include unreimbursed medical expenses of the owner, his or her spouse or dependents.
What if I use my HSA for a nonqualified medical expense?
Nonqualified withdrawals from your HSA are considered taxable income. The money you spend would be added to your gross income and taxed, and would also be subject to a 20 percent penalty. An exception to this rule is if you are age 65 or older, you are totally and permanently disabled, or you make the withdrawal after you die.
What if I want to use my HSA to pay my premiums?
This would not be considered a qualified medical expense and would be subject to taxes and penalties.
What if I want to use my HSA to pay for long-term care insurance?
This is allowable. HSA distributions used to pay for long-term care insurance premiums qualify as tax-free, penalty-free distributions. However, there is an annual limit to the amount you may contribute toward this expense, which is adjusted by the IRS every year.
What if I want to close my account?
Unless any of the previous exceptions have been met, the funds remaining in the account would be subject to taxes and penalties if withdrawn for reasons other than a qualified medical expense.
What if I want to invest the funds in my HSA?
You can invest the funds in bank accounts, money markets, mutual funds and stocks, if that is something your HSA servicer allows. Any earnings made on the investments would not count toward your annual contribution limit. You may not invest in collectibles, art, automobiles or real estate.
What if I leave my employer?
Your HSA belongs to you regardless of your employment. If you change jobs, or stop working altogether, you can keep your total HSA balance, including all employer contributions. You can continue spending the account balance on qualified medical expenses free of taxes or penalties.
However, you will not be able to make further contributions to your account, unless you remain enrolled in a HDHP. If you lose your HDHP, all contributions to an HSA must be suspended until you are back on an HSA-compliant HDHP plan.
What if I change my health coverage to a plan that doesn’t allow an HSA?
You will have to stop making contributions to your HSA, but you will be free to spend the account balance with the same tax-free benefits, provided they go toward qualified medical expenses. You could also hold on to the balance and any investments until age 65, at which point the money would be available to you with no taxes or penalties.
For more information on these or other HSA scenarios, contact CIBC of Illinois, Inc. today.
On May 4, 2015, the Internal Revenue Service (IRS) released Revenue Procedure 2015-30 to announce the inflation-adjusted limits for health savings accounts (HSAs) for calendar year 2016. The IRS announced the following limits for 2016:
- The maximum HSA contribution limit;
- The minimum deductible amount for high deductible health plans (HDHPs); and
- The maximum out-of-pocket expense limit for HDHPs.
These limits vary based on whether an individual has self-only or family coverage under an HDHP.
Only some of the HSA limits will increase for 2016. The limits that will increase are the HSA contribution limit for individuals with family HDHP coverage and the maximum out-of-pocket expense limit for self-only and family HDHP coverage.
|Type of Limit||2015||2016||Change|
|HSA Contribution Limit||Self-only||$3,350||$3,350||No change|
|HSA Catch-up Contributions (not subject to adjustment for inflation)||Age 55 or older||$1,000||$1,000||No change|
|HDHP Minimum Deductible||Self-only||$1,300||$1,300||No change|
|HDHP Maximum Out-of-pocket Expense Limit (deductibles, copayments and other amounts, but not premiums)||Self-only||$6,450||$6,550||Up $100|
Just let us know if you have any other questions about this, or any other aspect of the Affordable Care Act.
http://www.CIBCINC.com / 1-866-936-3580
CIBC of Illinois specializes in Group Benefit plans, and in order to best serve our clients, we also employ consultants that specialize in individual and family health insurance plans. In both of these areas, we continually get asked about high deductible plans because, in most cases, there is a significant cost advantage found in these types of plans. Hopefully this article will provide some basic information, and as always, please contact us for a detailed analysis.
Moving From a Standard Plan to an HDHP
There is no such thing as a one-size-fits-all health plan. Everyone has different health insurance needs depending on their health care requirements along with those of their dependents. While some prefer standard deductible health insurance (often called a PPO health insurance plan), people are increasingly switching to a High Deductible Health Plan (HDHP) with a Health Savings Account (HSA) as a better way to maximize their health care dollars.
Standard Plans vs. HDHPs
Standard plans and HDHPs are set up much in the same way. Under both plans, the member pays a premium for coverage. Both must cover preventive services free of charge. If a member receives nonpreventive medical care, he or she pays a deductible—a specified amount of money that the insured must pay before an insurance company will pay a claim. The chief difference between the plans is that under an HDHP, premium payments are considerably lower and the deductible is considerably higher.
The minimum deductibles for HDHPs are established by the IRS. For 2015, the minimum deductible is $1,300 for individuals and $2,600 for families. Comparatively, standard plans come with a deductible that is generally quite a bit lower.
The cost of the higher premiums for HDHP plans is offset by two factors. First, as previously mentioned, the premium price for an HDHP is much lower than standard plans. This means that members who use little or no medical care during the year can save hundreds of dollars that would otherwise go to unnecessary health coverage, while still remaining compliant with the individual mandate provision of the Affordable Care Act (ACA).
|While some people prefer standard deductible health insurance, people are increasingly switching to an HDHP with an HSA as a better way to maximize their health care dollars.|
The second major factor setting HDHPs apart from standard plans is the addition of an HSA.
Health Savings Accounts
HSAs are one of several types of tax-advantaged health accounts, and are exclusively available to people enrolled in an HSA-compliant HDHP.
With an HSA, the account holder or his or her employer (usually both) make contributions into a savings account. No taxes are deducted from money placed into the account, as the HSA contribution is withdrawn from a paycheck before taxes are assessed. While in the savings account, the money can earn interest. The employee is free to spend that money on qualified medical expenses.
The total amount that can be placed in an HSA per year is capped by the IRS. For 2015, the maximum contribution limit is $3,350 for individuals and $6,650 for families, though account holders over 55 years old may contribute an extra $1,000 to those totals.
These limits are significantly higher than other types of tax-advantaged health accounts, and unlike the other options, HSAs have additional unique features that allow you to save more money and keep it over a longer period of time. Whereas funds in health Flexible Spending Accounts (FSAs) and Health Reimbursements Arrangements (HRAs) come with an expiration date or a maximum carry-over dollar amount, HSAs allow you to build your balance as high as you wish in perpetuity. Except for the cap on total contributions per year, there are no limits on how much money can be in your account and how long it remains open.
Additionally, HSAs are individually owned accounts, meaning employees take the account—including any employer contributions—with them if they leave their employer.
Using Health Care with an HDHP
Because of the high deductibles associated with HDHPs, having an HDHP means you need to become a smart health care shopper.
The most important thing to keep in mind is that some types of health care products and services cost much more than similar items, and the more expensive option may not be necessary for the treatment you require.
Additionally, like most other health plans, HDHPs cover preventive services at no cost. Preventive care is defined as medical checkups and tests, immunizations and counseling services used to prevent chronic illnesses from occurring. Preventive care not only keeps you healthy, but it can also monitor and even reduce the risk of developing future, costly health problems.
Most types of specific preventive services are listed here. While it can sometimes be difficult to determine if a specific medical service qualifies as preventive, you can call your health plan to learn if a service is considered preventive before receiving it.
Other medial savings strategies people with HDHPs should consider are:
- Using a generic in place of a name brand prescription can result in significant savings. While there is not a generic version for every type of drug, the only difference between a branded drug and a generic counterpart is the name; they both have the same active ingredients. If you need medication, find out what class of drugs your prescription is classified under. If you receive a name brand prescription from a doctor, ask if a generic is available.
- Emergency Room vs. Urgent Care.Like prescriptions, there is a sizable cost adjustment between emergency rooms and urgent care. It is very expensive for hospitals to support all of the equipment and staff that an emergency room requires, so visits to the emergency room generally cost much more than those to a doctor’s office or an urgent care center. If you develop a problem that needs to be treated quickly, but it is not life threatening or risking disability, go to an urgent care clinic.
- Qualified Medical Expenses. Use your HSA to pay for qualified medical expenses without paying taxes. Qualified medical expenses include the costs of diagnosis, cure, mitigation, treatment or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for medical services rendered by physicians, surgeons, dentists and other medical practitioners. They also include the costs of equipment, supplies and diagnostic devices needed for these purposes. Like preventive care, there can sometimes be uncertainty surrounding what is an allowable qualified medical expense. Specific qualified medical expenses are approved by the IRS, and a list of them can be found here.
HDHPs and HSAs are not the ideal health coverage plan for everyone. However, for many people, HDHPs are a great way to avoid paying for superfluous coverage and HSAs are an excellent vehicle for stockpiling tax-free money to use on future health care needs.
To prepare for open enrollment, health plan sponsors should become familiar with the legal changes affecting the design of their plans for the 2015 plan year. These changes are primarily due to the Affordable Care Act (ACA). Employers should review their plan documents to confirm that they include these required changes.
In addition, any changes to a health plan’s benefits for the 2015 plan year should be communicated to plan participants. Health plan sponsors should also confirm that their open enrollment materials contain certain required participant notices, such as the summary of benefits and coverage (SBC).
There are also some participant notices that must be provided annually or upon initial enrollment. To minimize cost and streamline administration, employers should consider including these notices in their open enrollment materials.
Grandfathered Plan Status
A grandfathered plan is one that was in existence when the ACA was enacted on March 23, 2010. If you make certain changes to your plan that go beyond permitted guidelines, your plan is no longer grandfathered. Contact CIBC of Illinois, Inc. if you have questions about changes you have made, or are considering making, to your plan.
- If you have a grandfathered plan, determine whether it will maintain its grandfathered status for the 2015 plan year. Grandfathered plans are exempt from some of the ACA’s requirements. A grandfathered plan’s status will affect its compliance obligations from year to year.
- If your plan will lose grandfathered status for 2015, confirm that the plan has all of the additional patient rights and benefits required by the ACA. This includes, for example, coverage of preventive care without cost-sharing requirements.
Effective for plan years beginning on or after Jan. 1, 2014, non-grandfathered health plans are subject to limits on cost-sharing for essential health benefits (EHB). As enacted, the ACA included an overall annual limit (or an out-of-pocket maximum) for all health plans and an annual deductible limit for small insured health plans. On April 1, 2014, the ACA’s annual deductible limit was repealed. This repeal is effective as of the date that the ACA was enacted, back on March 23, 2010.
The out-of-pocket maximum, however, continues to apply to all non-grandfathered group health plans, including self-insured health plans and insured plans. Effective for plan years beginning on or after Jan. 1, 2015, a health plan’s out-of-pocket maximum for EHB may not exceed $6,600 for self-only coverage and $13,200 for family coverage.
- Review your plan’s out-of-pocket maximum to make sure it complies with the ACA’s limits for the 2015 plan year ($6,600 for self-only coverage and $13,200 for family coverage).
- If you have a health savings account (HSA)-compatible high deductible health plan (HDHP), keep in mind that your plan’s out-of-pocket maximum must be lower than the ACA’s limit. For 2015, the out-of-pocket maximum limit for HDHPs is $6,450 for self-only coverage and $12,900 for family coverage.
- If your plan uses multiple service providers to administer benefits, confirm that the plan will coordinate all claims for EHB across the plan’s service providers, or will divide the out-of-pocket maximum across the categories of benefits, with a combined limit that does not exceed the maximum for 2015.
- Be aware that the ACA’s annual deductible limit no longer applies to small insured health plans.
Health FSA Contributions
Effective for plan years beginning on or after Jan. 1, 2013, an employee’s annual pre-tax salary reduction contributions to a health flexible spending account (FSA) must be limited to $2,500. On Oct. 31, 2013, the Internal Revenue Service (IRS) announced that the health FSA limit remained unchanged at $2,500 for 2014. However, the $2,500 limit is expected to be adjusted for cost-of-living increases for later years. The IRS is expected to release the health FSA limit for 2015 later this year.
- Work with your advisors to monitor IRS guidance on the health FSA limit for 2015.
- Once the 2015 limit is announced by the IRS, confirm that your health FSA will not allow employees to make pre-tax contributions in excess of that amount for 2015. Also, communicate the 2015 health FSA limit to employees as part of the open enrollment process.
Transition Policy for Small Group Health Plans
Some non-grandfathered health plans in the small group market were allowed to renew for 2014 without adopting all of the ACA’s market reforms under a temporary transition policy adopted by the Obama Administration. The transition policy was originally a one-year reprieve from certain ACA market reforms; however, it was later extended for two more years, to policy years beginning on or before Oct. 1, 2016.
The transition relief is not available to all small group health plans. It only applies to small businesses with coverage that was in effect on Oct. 1, 2013. Also, because the insurance market is primarily regulated at the state level, state governors or insurance commissioners must allow for the transition relief. In addition, health insurance issuers are not required to follow the transition relief and renew plans.
Even if transition relief was available for a small group plan in 2014, it may not be available in 2015 and later years due to insurance market regulations or issuer decisions. If the transition relief no longer applies to your small group plan, confirm that your plan includes the following ACA market reforms for 2015:
- Pre-existing Condition Exclusions—The ACA prohibits health plans from imposing pre-existing condition exclusions (PCEs) on any enrollees. (PCEs for enrollees under 19 years of age were eliminated by the ACA for plan years beginning on or after Sept. 23, 2010).
- Coverage for Clinical Trial Participants—Non-grandfathered health plans cannot terminate coverage because an individual chooses to participate in a clinical trial for cancer or other life-threatening diseases or deny coverage for routine care that would otherwise be provided just because an individual is enrolled in a clinical trial.
- Comprehensive Benefits Package—Insured plans in the individual and small group market must cover each of the essential benefits categories listed under the ACA. Each state has a specific benchmark plan for determining the essential health benefits for insurance coverage in that state.
Employer Penalty Rules
Under the ACA’s employer penalty rules, applicable large employers (ALEs) that do not offer health coverage to their full-time employees (and dependent children) that is affordable and provides minimum value will be subject to penalties if any full-time employee receives a government subsidy for health coverage through an Exchange. The ACA sections that contain the employer penalty requirements are known as the “employer shared responsibility” provisions or “pay or play” rules. These rules were set to take effect on Jan. 1, 2014, but the IRS delayed the employer penalty provisions and related reporting requirements for one year, until Jan. 1, 2015.
On Feb. 10, 2014, the IRS released final regulations implementing the ACA’s employer shared responsibility rules. Among other provisions, the final regulations establish an additional one-year delay for medium-sized ALEs, include transition relief for non-calendar plans and clarify the methods for determining employees’ full-time status.
To prepare for the employer shared responsibility requirements, an employer should consider taking the following key steps:
- Determine ALE status for 2015, including eligibility for the one-year delay for medium-sized ALEs;
- For sponsors of non-calendar year plans, determine whether you qualify for the transition relief that allows you to delay complying with the pay or play rules until the start of your 2015 plan year;
- Establish a system for identifying full-time employees (those working 30 or more hours per week);
- Document plan eligibility rules; and
- Test your health plan for affordability and minimum value.
HSA Limits for 2015
If you offer a high deductible health plan (HDHP) to your employees that is compatible with a health savings account (HSA), you should confirm that the HDHP’s minimum deductible and out-of-pocket maximum comply with the 2015 limits. Also, the 2015 increased HSA contribution limits should be communicated to participants. The following table contains the HDHP and HSA contribution limits for 2015.
HDHP Minimum Deductible Amount Individual $1,300
HDHP Maximum Out-of-Pocket Amount
HSA Maximum Contribution Amount
Catch-up Contributions (age 55 or older) $1,000
- Summary of Benefits and Coverage
The ACA requires health plans and health insurance issuers to provide a summary of benefits and coverage (SBC) to applicants and enrollees to help them understand their coverage and make coverage decisions. Plans and issuers must provide the SBC to participants and beneficiaries who enroll or re-enroll during an open enrollment period. The SBC also must be provided to participants and beneficiaries who enroll other than through an open enrollment period (including individuals who are newly eligible for coverage and special enrollees).
Federal agencies have issued a template for SBCs, which should be used for 2015 plan years. The template includes information on whether the plan provides minimum essential coverage and meets minimum value requirements. The SBC template (and sample completed SBC) are available on the Department of Labor (DOL) website.
In connection with your plan’s 2015 open enrollment period, the SBC should be included with the plan’s application materials. If plan coverage automatically renews for current participants, the SBC must generally be provided no later than 30 days before the beginning of the new plan year.
For self-funded plans, the plan administrator is responsible for providing the SBC. For insured plans, both the plan and the issuer are obligated to provide the SBC, although this obligation is satisfied for both parties if either one provides the SBC. Thus, if you have an insured plan, you should work with your health insurance issuer to determine which entity will assume responsibility for providing the SBCs. Please contact your CIBC of Illinois, Inc. representative for assistance.
- Grandfathered Plan Notice
If you have a grandfathered plan, make sure to include information about the plan’s grandfathered status in plan materials describing the coverage under the plan, such as summary plan descriptions (SPDs) and open enrollment materials. Model language is available from the DOL.
- Notice of Patient Protections
Under the ACA, non-grandfathered group health plans and issuers that require designation of a participating primary care provider must permit each participant, beneficiary and enrollee to designate any available participating primary care provider (including a pediatrician for children). Also, plans and issuers that provide obstetrical/gynecological care and require a designation of a participating primary care provider may not require preauthorization or referral for obstetrical/gynecological care.
If a non-grandfathered plan requires participants to designate a participating primary care provider, the plan or issuer must provide a notice of these patient protections whenever the SPD or similar description of benefits is provided to a participant, such as open enrollment materials. If your plan is subject to this notice requirement, you should confirm that it is included in the plan’s open enrollment materials. Model language is available from the DOL.
Group health plan sponsors should consider including the following enrollment and annual notices with the plan’s open enrollment materials.
- Initial COBRA Notice
Plan administrators must provide an initial COBRA notice to participants and certain dependents within 90 days after plan coverage begins. The initial COBRA notice may be incorporated into the plan’s SPD. A model initial COBRA Notice is available from the DOL.
- Notice of HIPAA Special Enrollment Rights
At or prior to the time of enrollment, a group health plan must provide each eligible employee with a notice of his or her special enrollment rights under HIPAA.
- Annual CHIPRA Notice
Group health plans covering residents in a state that provides a premium subsidy to low-income children and their families to help pay for employer-sponsored coverage must send an annual notice about the available assistance to all employees residing in that state. The DOL has provided a model notice.
- WHCRA Notice
Plans and issuers must provide notice of participants’ rights under the Women’s Health and Cancer Rights Act (WHCRA) at the time of enrollment and on an annual basis. Model language for this disclosure is available on the DOL’s website in the compliance assistance guide.
- Medicare Part D Notices
Group health plan sponsors must provide a notice of creditable or non-creditable prescription drug coverage to Medicare Part D eligible individuals who are covered by, or who apply for, prescription drug coverage under the health plan. This creditable coverage notice alerts the individuals as to whether or not their prescription drug coverage is at least as good as the Medicare Part D coverage. The notice generally must be provided at various times, including when an individual enrolls in the plan and each year before Oct. 15 (when the Medicare annual open enrollment period begins). Model notices are available at www.cms.gov/creditablecoverage.
- Michelle’s Law Notice
Group health plans that condition dependent eligibility on a child’s full-time student status must provide a notice of the requirements of Michelle’s Law in any materials describing a requirement for certifying student status for plan coverage. Under Michelle’s Law, a plan cannot terminate a child’s coverage for loss of full-time student status if the change in status is due to a medically necessary leave of absence.
- HIPAA Opt-out for Self-funded, Non-federal Governmental Plans
Sponsors of self-funded, non-federal governmental plans may opt out of certain federal mandates, such as the mental health parity requirements and the WHCRA coverage requirements. Under an opt-out election, the plan must provide a notice to enrollees regarding the election. The notice must be provided annually and at the time of enrollment. Model language for this notice is available for sponsors to use.
This Legislative Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
We get a great deal of questions from our clients and their employees regarding how Flex Accounts and Health Savings Accounts function in the Reform Era. Some of the rules are quite difficult to apply to a particular clients’ benefit plan, even for an experienced firm like ours. It talkes careful analysis and keen insight into current and evolving regulations.
On March 28, 2014, the Internal Revenue Service (IRS) released an Office of Chief Counsel Memorandum to provide information on how health flexible spending account (FSA) carryovers affect eligibility for health savings accounts (HSAs). Although the IRS memorandum is not official guidance, it helps clarify the IRS’ position on health FSA carryovers and HSA eligibility.
In the memorandum, the IRS provides that an individual who carries over unused funds from a prior year to a current year under a general purpose health FSA will not be eligible for HSA contributions for the entire current plan year (even for months after the health FSA no longer has any amounts available to pay or reimburse medical expenses).
However, the memorandum offers some alternative approaches that allow health FSA carryovers while preserving HSA eligibility. These approaches include carrying over unused amounts to an HSA-compatible health FSA and allowing individuals participating in a general purpose FSA to decline or waive the carryover.
Health FSA Carryovers
In general, health FSAs are subject to a “use-or-lose” rule that requires any unused funds at the end of the plan year (plus any applicable grace period) to be forfeited.
On Oct. 31, 2013, the IRS released Notice 2013-71, which relaxed the use-or-lose rule. Under the relaxed rule, employers with health FSAs may allow participants to carry over up to $500 in unused funds into the next plan year. The carryover of up to $500 may be used to pay or reimburse medical expenses incurred during the entire plan year to which the health FSA is carried over.
This carryover provision is different than a health FSA’s run-out period, which is a period immediately after the end of the plan year when a participant may submit claims for expenses incurred during the plan year.
A health FSA may be amended to include the carryover feature only if the plan does not also incorporate the grace period rule. Also, a health FSA may specify a lower carryover amount than the $500 maximum, and has the option of not permitting carryovers at all. Any unused amount in excess of $500 (or a lower amount specified in the plan) remaining at the end of the run-out period for the plan year will be forfeited.
For ease of administration, a health FSA is permitted to treat reimbursements of all claims for expenses that are incurred in the current plan year as reimbursed first from unused amounts credited for the current plan year and, only after exhausting these current plan year amounts, as then reimbursed from unused amounts carried over from the prior plan year.
Only an eligible individual may establish an HSA and have HSA contributions made on his or her behalf. To be HSA-eligible, an individual must be covered under a high deductible health plan (HDHP) and generally may not be covered under a health plan that is not an HDHP.
An individual who is covered by a health FSA is eligible for HSA contributions only if the health FSA is HSA-compatible (that is, a limited purpose health FSA or a post-deductible health FSA). Thus, an individual who is covered by a health FSA that pays or reimburses all qualified medical expenses (that is, a general purpose health FSA) is not an eligible individual for purposes of HSA contributions. This disqualification extends to the entire plan year, even if the health FSA has paid or reimbursed all amounts prior to the end of the plan year.
FSA Carryovers and HSA Eligibility
The IRS memorandum addresses how the carryover of unused amounts under a health FSA from a prior plan year affects an individual’s HSA eligibility during the current plan year.
Carryovers to General Purpose Health FSAs
The IRS memorandum provides that an individual who has coverage under a general purpose health FSA solely as a result of a carryover of unused amounts from the prior year is not eligible for HSA contributions.
This rule applies regardless of the amount available from the health FSA for any month during the plan year. Thus, the individual’s ineligibility for HSA contributions continues for the entire health FSA plan year, even for months in the plan year after the health FSA no longer has any amounts available to pay or reimburse medical expenses.
A cafeteria plan may provide that if an individual participates in a general purpose health FSA that provides for a carryover of unused amounts, the individual may elect prior to the beginning of the following year to decline or waive the carryover for the following year. In that case, the individual who declines or waives the carryover under the terms of the cafeteria plan may contribute to an HSA during the following year (assuming he or she meets the other tax rules for HSA eligibility).
Carryovers to HSA-compatible Health FSAs
An individual who participates in a general purpose health FSA and elects for the following year to participate in an HSA-compatible health FSA may elect to have any unused amounts from the general purpose health FSA carried over to the HSA-compatible health FSA. This individual is eligible for HSA contributions during the following year (assuming he or she meets the other tax rules for HSA eligibility).
There is no requirement that the unused amounts in the general purpose health FSA only be carried over to a general purpose health FSA. However, the carryover amounts may not be carried over to a non-health FSA or another type of cafeteria plan benefit.
A cafeteria plan that offers both a general purpose health FSA and an HSA-compatible health FSA may automatically treat an individual who elects coverage in an HDHP for the following year as enrolled in the HSA-compatible health FSA and carry over any unused amounts from a general purpose health FSA to the HSA-compatible health FSA for the following year.
Administration During Run-out Period
If an individual elects to carry over unused amounts from a general purpose health FSA to an HSA-compatible health FSA, the uniform coverage rules may be applied during the run-out period of the general purpose health FSA as follows:
- The unused health FSA amounts may be used to reimburse any allowed medical expenses incurred prior to the end of the general purpose health FSA plan year.
- Any claims covered by the HSA-compatible health FSA must be reimbursed in a timely fashion up to the amount elected for the HSA-compatible health FSA plan year.
- Any claims in excess of the elected amount may be reimbursed after the run-out period when the amount of any carryover is determined.
Example: Employer offers a calendar-year general purpose health FSA and a calendar-year HSA-compatible health FSA. Both FSAs provide for a carryover of up to $500 of unused amounts and do not have a grace period. Employee has an unused amount of $600 in the general purpose health FSA on Dec. 31 of Year 1. Prior to Dec. 31 of Year 1, Employee elects $2,500 in the HSA-compatible health FSA for Year 2 and elects to have any carryover go to the HSA-compatible health FSA. Employee also elects coverage by an HDHP for Year 2.
In January of Year 2, Employee incurs and submits a claim for $2,700 in dental care covered by the HSA-compatible health FSA. The plan reimburses $2,500, the amount elected, in a timely fashion. In February of Year 2, Employee submits and is reimbursed from the general purpose health FSA for $300 in medical expenses incurred prior to Dec. 31 of Year 1. At the end of the run-out period, $300 in the general purpose health FSA is unused and carried over to the HSA-compatible health FSA. Employee is then reimbursed $200 for the excess of the January claim over the amount elected for the HSA-compatible health FSA. Employee has $100 remaining in the HSA-compatible health FSA to be used for expenses incurred in the year or carried over to the next year. Employee is allowed to contribute to an HSA as of Jan. 1 of Year 2.
Contact us and we will perform an analysis customized to your specific circumstances.
On April 1, 2014, President Obama signed the Protecting Access to Medicare Act of 2014 (Act) into law. The Act’s main provisions preserve the pay rate for physicians treating Medicare patients and delay the compliance deadline for converting to the updated International Classification of Diseases codes for at least one year.
The Act also eliminates the Affordable Care Act’s (ACA) annual deductible limit that applied to health plans in the small group market. This change is retroactively effective to when the ACA was enacted in March 2010.
The Act does NOT eliminate the ACA’s out-of-pocket maximum, which applies to all non-grandfathered health plans for plan years beginning on or after Jan. 1, 2014.
Effective for 2014 plan years, the ACA requires non-grandfathered health plans to comply with cost-sharing limits with respect to their coverage of essential health benefits.
Annual Deductible Limit
As originally enacted, the ACA included an annual deductible limit that applied to health plans offered in the small group market. This limit became effective for plan years beginning on or after Jan. 1, 2014. Effective for 2014 plan years, the ACA provided that the annual deductible may not exceed:
- $2,000 for self-only coverage; and
- $4,000 for family coverage.
The ACA required the deductible limit to be adjusted annually. For 2015, the Department of Health and Human Services (HHS) announced that the annual deductible limit would increase to $2,050 for self-only coverage and $4,100 for family coverage.
HHS created an exception that allowed a small health plan’s deductible to exceed the ACA limit if a plan could not reasonably reach the actuarial value of a given level of coverage (that is, a metal tier—bronze, silver, gold or platinum) without exceeding the limit. This exception was available to all metal-level plans, but it was particularly useful for bronze-level plans.
The ACA places an annual limit on total enrollee cost-sharing for essential health benefits, effective for plan years beginning on or after Jan. 1, 2014. This annual limit, or out-of-pocket maximum, applies to all non-grandfathered health plans. This includes, for example, self-insured health plans and insured health plans of any size.
Effective for 2014 plan years, a non-grandfathered health plan’s out-of-pocket maximum may not exceed:
- $6,350 for self-only coverage; and
- $12,700 for family coverage.
The ACA requires the out-of-pocket maximum to be adjusted annually. For 2015, HHS announced that the out-of-pocket maximum will increase to $6,600 for self-only coverage and $13,200 for family coverage.
In addition, HHS provided transition relief for 2014 plan years for plans that utilize more than one service provider to administer benefits.
Repeal of Annual Deductible Limit
The Act eliminates the ACA’s annual deductible limit for health plans in the small group market. This change is effective as of the date of the ACA’s enactment in March 2010.
The repeal of the annual deductible limit will provide small employers with more flexibility to control premium costs by selecting a health plan with a higher deductible. However, the out-of-pocket maximum, which includes the deductible amount, and the ACA’s actuarial requirements for small health plans will continue to limit enrollee cost-sharing in small employer plans.
Small employer health plans that have started their 2014 plan years (for example, calendar year plans) were already required to incorporate the ACA’s annual deductible limit, unless a higher limit applied due to the actuarial value exception. It is not likely that these plans will be affected by the repeal of the ACA’s deductible limit until their 2015 plan years.
However, small employer health plans that have not started their 2014 plan years (for example, health plans with a Nov. 1 to Oct. 31 plan year) may be able to avoid the ACA’s deductible limit altogether.
Delay for ICD-10 Codes
The Act delays the deadline for HIPAA-covered entities to comply with the updated set of diagnosis and procedure codes known as the International Classification of Diseases, 10th Edition (ICD-10). The deadline is delayed from Oct. 1, 2014, until at least Oct. 1, 2015. This delay will give covered entities and their business associates more time to fully transition to the ICD-10 codes for their HIPAA standard transactions.
Defined Contribution Health Plans: A Transition from Defined Benefits to Defined Contribution in the Healthcare Reform Era
By Andrew Wheeler,
Director of eCommerce
CIBC of Illinois, Inc.
For many years, businesses have operated under the Defined Benefit (DB) model of health plans for their employees. Employers would pick a plan or set of plans and tell employees “here are your benefits, so go pick the level of coverage you and your family needs. We will pay X amount/percentage for your contribution to our group plan(s).” It was for good reason; there is no viable health care market for who have a prior medical history. Pre-existing conditions and underwriting requirements excluded a large part of the employer workforce potential so there were no other options, to be honest.
Now, as a result of the implementation of the Affordable Care Act 2014 and the rules that eliminate medical underwriting and pre-ex exclusions, we are at the point where a new paradigm can enter the employee benefits arena; Defined Employer Contributions (DC).
This Sounds Vaguely Familiar?
The whole thought of DC is not new as we have been using this methodology with retirement benefits for years. In the mid-2000’s as retiree costs skyrocketed, companies faced a choice of raising the cap associated with retiree contributions, or pass along the increases to the retirees. Most companies chose the latter of these two and DC was off and running. The same applies to employee retirement contributions.
Skin in the Game
We have already seen the recognition of the need to get employees involved in the structure and operation of their health plan, even before ACA became law. The use of an HRA/HSA within the health plan is a hybrid of DC and DB, and most employees are at least aware of these types of hybrids. Many employees and employers have experienced the benefits of becoming participants in Consumer Driven Health Plans (CDHP). When implemented correctly, with robust employee education and careful plan design, these types of CDHP’s have done the trick. They have provided stability, however tedious and fleeting, as opposed to the DB model.
Now, as we look at full implementation of the ACA in 2014, employers are looking at a similar situation with their health plans. Because there is the “Affordability” factor associated with ACA, employers cannot require employees to pay more than 9.5% of their W2 wages for employee-only contributions without incurring a $3000 tax (fine). Costs are being shifted to the employer contribution in most cases, and employees are left with picking up more of the spouse/family costs as a result. Employers are looking for some stability in a market that, by all indications, will continue to be volatile for the foreseeable future. Costs are rising in the face of ‘Affordable Care” legislation and carriers are signaling that they will continue to rise well into 2014 and beyond. Just like The Rolling Stones, employers are also crying “Gimme Shelter,” and maybe a migration to DC is that path to peace of mind for employers so they don’t “fade away.”
Defined Contribution: The Model
In the DC model, employers contribute a fixed amount to employees for health insurance purchases. The employer selects products to offer to employees and sets a defined contribution. The employees go to the exchange and use the employer contribution to select and insurance plan that meets their needs. Now, the risk of premium increases moves to the employees.
Employers usually establish HRA’s to make contributions in their DC plans because unlike FSA’s and HSA’s, HRA’s can be used to reimburse premiums. This also allows employers to utilize health plans other than High Deductible (HDHP) plans in their offering. Because ACA prohibits annual limits on essential benefits after 2013, employers need to know if their HRA is Integrated or Stand-Alone.
Integrated HRA’s are not required to be compliant with the ACA annual limit restriction if the coverage by itself satisfies the annual limit restriction. Integration also occurs when the HRA is available only to employees who are covered by employer coverage that meets annual limit regulations. As of right now, the agencies implementing ACA state that an employer HRA cannot be integrated with the individual market coverage or with an employer plan that provides coverage through individual policies. In addition, an employer HRA may be treated as integrated only if the employee receiving the HRA is enrolled in that coverage.
Stand-alone HRA’s that do not fall under an exemption (retiree, vision only, dental only, certain FSA’s) will not be subject to annual limit restrictions. This means that employers will not be able to offer a stand-alone HRA for employees to purchase coverage in or outside of the exchanges.
SHOP and Private Exchanges
With the recent proposed rule allowing States to delay SHOP exchanges until 2015, small group employers will have their traditional broker or direct relationship with carriers. Employers can also utilize private exchanges that are starting to pop up. Unlike the Federal or State-based exchanges, these private hubs will contain other lines of employee benefits like health, vision, and dental insurances. Employers will be able to use the DC model in private exchanges, within the rules laid out in the above paragraphs, but it is quite unclear how employees will adjust to a DC model without the traditional broker-advocate-employee personalized connections. As with much of the ACA, it is unclear how compliance with the ACA will be monitored by HHS and the IRS with regard to private exchanges. However nebulous, it is still something that small group employers should at least be aware of and seek counsel on.
This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.
To get more information on CIBC of Illinois, visit us at http://www.CIBCINC.Com or call toll free 877-936-3580.
- How Your Health Insurance Will Be Turned On Its Head (forbes.com)
By William Johnson,
President and CEO CIBC of Illinois, Inc.
All employers get frustrated with rising health insurance costs. Just like the employers, employees also feel the pinch of diminished benefits and rising contribution levels. And believe me; they let you know about it. For both, it seems fait accompli that the sun will rise, the Cubs will not be in the World Series, and insurance costs will go up each and every year.
Even if an employer tries to do the right things to control costs on their own, it is almost like eating a shoe with a spoon; it’s cumbersome, hard to cut into small manageable bites, and you would rather be eating something else, anyway. That is where a Benefit Consultant is of value. Instead of ordering off the menu, we take the “shoe” off your plate and let you get back to the core of your business operations.
HRA and HSA Implementation
Two methods of controlling costs we can deploy are a Health Savings Account (HSA) and/or Health Reimbursement Arrangement (HRA). Businesses can use either of these or both in concert to gain control of their benefit costs. An HSA is a bank account that is linked to a high deductible health plan. When an employer or employee contributes to the HSA, those dollars immediately become pre-tax contributions. An HRA is simply a funding arrangement between the employer and employee that covers qualified eligible benefits.
So let’s tackle the HSA first. HSA eligible plans are typically lower in premium due to the fact that they are higher in deductible than regular fully insured plans, and there are no copays before you meet your deductible. If the deductible is $2500, the insured must meet that deductible and then all eligible expenses are covered at 100%. There are some states where there is a copay on prescriptions after deductible is met, with certain carriers. These plans are great for those who are healthy and rarely got to the doctor for anything outside of their yearly checkup (which should be free due to Healthcare Reform, by the way), as well as those who have medical conditions that would cause them to max out their Out of Pocket expenses in the first few months of the year. The employee still gets the discounted rates via negotiated carrier discounts, but they are on the hook for the deductible, first. Keep in mind that payroll deducted contributions to premium and HSA bank accounts are a tax savings for the employee AND the employer.
If an employer utilizes an HRA, they can reimburse the employee for eligible expenses associated with the benefit plan. If the plan has a $1500 deductible, the employer could reimburse the second $750 of deductible (or the first, but that is not optimal in cost-control methodology). Using an HRA is optimal when there are significant savings to be gained by raising the plan deductible. Another benefit is that if there is no expense, there is no reimbursement…thus, no wasted premium dollars. We run the numbers based on actuarial norms and can accurately assess your cost-benefit strategy in this arena.
It is beneficial for some employers to deploy an HSA eligible plan, and then have the HRA in place to cover portions of the larger HSA deductible. If an employer has a $1000 deductible plan, and their renewal increase is such that it has become unaffordable for all concerned to continue with that deductible, the employer could typically save enough in premium to go with an HSA qualified plan that has a $2500 (or more) deductible. Then, the employer could potentially reimburse the first $500 of deductible and the last $1000 of deductible to the employee. In this manner, the cost increases have been mitigated, and the employee still has the same $1000 deductible in essence.
Consumerism and Cost
This also places the idea of consumerism into the employee’s view of healthcare. Employees tend to embrace going to Urgent Care facilities that cost $60 rather than the ER that costs thousands because THEY are a partner in the cost sharing. And this type of employee-based cost/benefit analysis is a very good thing for your business.
Once employees become used to thinking about their healthcare in this manner, you can begin to utilize other methods to drill down to other levels of savings. Since we meet with all of our clients’ employees during these types of transitions, I can tell you that employee fear of a high deductible is real. When presented with the savings opportunity, it is our experience that employees understand the big-picture and start making cost-conscious decisions for themselves…which are indirectly good decisions for your business.
Let us know if you are tired of the “shoes” your broker delivers at each renewal. We find Solutions for your business. Solutions, that work.
This article is intended for informational purposes only and should not be construed as legal advice. Please consult with a legal professional for legal opinions.
To get more information on CIBC of Illinois, visit us at www.CIBCINC.Com or call toll free 877-936-3580.